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Business News (more headlines) 06-16-2003

AFTRA Joins ASCAP, BMI, SESAC, NMPA, SGA, RIAA, AFM And AARC In Filing Comments On The Copyright Royalty And Distribution Reform Act Of 2003

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June 6, 2003

Memorandum to:
Chairman James Sensenbrenner
Ranking Member John Conyers
Chairman Lamar Smith
Ranking Member Howard Berman

Melissa McDonald
Alec French

Re: CARP Reform Legislation (Chairman's Amendment), H.R. 1417


As representatives of the creators and copyright owners of musical compositions and sound recordings, we applaud H.R. 1417 as reported out of the Subcommittee, and believe this much-needed legislation will greatly improve distribution and rate proceedings under the various compulsory licenses. That said, and as the subcommittee staff has invited, we have reached a consensus on several suggestions for further improvements in the legislation. A few are of major importance; others cover technical, drafting, or other clarifications.

1. Major Issues

Hearing Process: (Sec. 803 (b) (4) (C)): As envisioned in the bill, the CRJs are required to issue regulations to govern proceedings. In exercising that rulemaking authority (which we support), the CRJs are required to include several procedures and evidentiary rules that, if implemented, will result in greatly increased costs of proceedings and, in the extreme, legal "fishing expeditions." (Indeed, as the bill stands, a party could engage in virtually unrestrained discovery solely for the purpose of gleaning information, for the price of the $150 filing fee.) These greater costs of intrusive discovery will cause an especial hardship on small claimants.

We have the following concerns: First, the discovery rules will be far too broad and will not achieve the desired result of streamlined, efficient distribution and rate proceedings. The CRJ hearing process should not work as full Federal district court proceedings do, with wide-ranging discovery before direct or rebuttal cases are even filed. Second, the hearsay evidence rule is neither appropriate nor necessary for an administrative proceeding. Finally, the subpoena power would be subject to abuse and would result in an escalation of costs for both parties and non-parties. In view of these concerns, we strongly urge that the administrative agency model for hearing process should be used, as follows:

1. Filing of written direct cases, in the form of witnesses' testimony, before any discovery. (And a similar provision for rebuttal cases, which the bill does not mention.)

2. Discovery that is limited to supporting documents for claims of fact made in the witnesses' testimony, to run for 60 days from submission of the testimony.

3. Settlement conferences to encourage settlement, and any settlement achieved until the time of final determination given effect. CRJs should not be present at settlement discussions, as discussed below.

4. Administrative agency, rather than Federal Rules of Evidence, evidentiary guidelines; in particular, hearsay admissible, but given only that weight deemed appropriate by the CRJs.

5. No subpoena power for the CRJs, especially of third parties or third-party evidence.

Accordingly, we suggest that sec. 803 (b) (4) (C) be deleted in its entirety, and replaced by a provision allowing the CRJs to adopt appropriate regulations governing the hearing process in accordance with prior practices of the CRT, the Copyright Office or the CARPs.

Offer of Judgment (Sec. 803 (b) (4) (C) (iv)): Because several of us suggested an offer of judgment provision, we particularly wish to comment on it. The offer of judgment procedure is excellent in conception, but as drafted, and on further consideration, the procedure would not work as desired. It could cause major problems in cases of offers made in multiparty proceedings involving fewer than all the parties, and might lead to catastrophic results if, for example, all parties in a Phase I cable distribution proceeding make an unaccepted offer to a single party, and then win a slightly more advantageous outcome, in which case the single party would be responsible for the reimbursement of millions of dollars in attorneys' fees. We had suggested the concept as an incentive to protect against abuse of the process by small claimants in distribution proceedings and to promote settlements with such claimants. H.R. 1417 now has included such incentives in other provisions, most notably the provisions for paper proceedings for small claimants and monetary penalties for bad faith claims. Accordingly, we suggest that this section be deleted. To maximize the incentive to prevent abuse of the distribution process, however, we suggest that, in keeping with standard practice in adjudicative proceedings, a filing fee (of $150) be required of all parties, including those who are heard on papers alone.

Settlements: Sec. 801 (b) (7) (B) would allow a "strike suit" type of objection in which one minor party (e.g., a claimant entitled to $1 out of a $10 million royalty fund or a single statutory licensee without even an intent to participate in a rate adjustment proceeding) would be able to (in the words of the D.C. Circuit in an early CRT decision), "upset the settlement applecart" of all the other parties, with absolutely no discretion on the part of the CRJs to put the settlement into effect. Comments should be allowed (as is the current practice in proceedings, although, as under the current regulations -- 37 CFR sec. 251.63(b) -- rates and terms jointly proposed by adverse parties should be adopted if there is no objection from a party with a substantial interest and an intent to participate in the proceeding), but not the absolute right to force the rejection of either a settlement agreement for the distribution of royalties or the rates and terms for a particular statutory license or class of statutory licensees. Indeed, mandating such a rejection is contrary to the legislative history of the DPRA.1 A participant in an arbitration proceeding should not be automatically bound by a settlement for the distribution of royalties or proposed rates and terms and may raise an objection. At the same time, once a rate-setting proceeding has commenced, a non-participant should not be able to object to a settlement or to negotiated rates and terms that the participants jointly propose to be the industry rates and terms. Such non-participants would not have the right to appeal a rates and terms determination reached by the CRJ if there were no settlement. They should not have greater rights to upset a settlement reached during the course of a proceeding than they have to upset a final determination reached by the CRJ. (Settlements, of course, differ from submissions of proposed rates and terms for an entire industry, which should be subject to objection, but not veto, by any party.) The CRJs should have discretion to weigh objections based on the party's intent to participate in the proceeding. Further, sec. 803 (b) (4) (C) (iii) mandates settlement conferences -- a good idea, which should be included in the regulations adopted by the CRJs -- but all mandatory settlement conferences should be outside the presence of the CRJs. It is important to keep the CRJs free of any bias that might result from hearing the settlement positions of the parties, which might differ from their litigation positions. In addition, as stated above, settlements should be allowed and given effect at any time; experience has shown that parties are frequently more amenable to settlement after hearings have occurred (and if all such parties agree, the settlement should be adopted, as no other party would have a right of appeal).

2. Technical, Clarifying, and Other Drafting Matters

Secs. 801 (b) (1) and (2): These amendments split what had been one paragraph into two. The words, "and terms," were omitted following "royalty rates" in subsection (1), as was the reference to sec. 112 (e). We are not clear on why these provisions were changed, or, indeed, if the change was intentional.

Secs. 801 (c) and 802 (f) (1) (A): Clarify that all consultations with the Copyright Office (not just those for "novel questions") should be on the record, and should be limited only to questions of law; the CRJs should be the sole triers of fact. Also clarify that any advice given by the Copyright Office in addition to that of "novel questions" under sec. 802(f)(1)(A)) should not be binding on the Judges.

Sec. 802 (a): Delete the word "financial". The CRJs should be free of any conflict of interest, not just financial conflicts of interest.

Sec. 803 (a) (1)(B)(ii): Clarify that the CRJs should also be bound by any court decisions which reviewed determinations of the CRT, CARPS, Librarian, or CRJs. In addition, add at end of the last sentence, "in accordance with regulations."

Sec. 803 (b) (1): This provision might be read to allow a party who files a notice of intent to participate and pays a filing fee to file a brief without any sponsoring witness. Such "amicus" participation should not be allowed (cf. the existing regulations which require a sponsoring witness, 37 C.F.R. sec. 251.43 (e)). While such activity may be the norm in rulemaking proceedings, it is not proper in adjudicative proceedings among adverse parties. In adjudicative proceedings, if a party wishes to be heard, it must subject itself to the crucible of examination by offering a sponsoring witness, and thus allow the CRJs to make an informed decision in conformity with due process requirements.

Sec. 803 (b) (2) (B): Imposition of a "fine" is a good idea, but poses certain technical issues: Where will the proceeds of the "fine" go? We suggest that it be added to the royalty fund being distributed to the other parties. Does the imposition of a "fine" require due process safeguards such as a hearing? How do the CRJs determine "bad faith"? We presume that "bad faith" will be determined based on the record and will not require further evidentiary fact-finding. Under this process, we would not object to making the "fine" discretionary. This could be achieved by use of the word "may" instead of "shall."

Sec. 803 (b) (3): Even if all the stated requirements are not met, deciding cases on papers alone should be allowed if all the parties agree to that procedure (thus saving costs).

Sec. 803 (c) (2): So that absence from a rehearing is not prejudicial, add at end of last sentence: "and no adverse inference shall be drawn from a party's lack of participation."

Sec. 803(d)(3). References to "jurisdiction" should be changed to "power" or "authority."

Sec. 6 of the bill provides that the Act and amendments to the Act take effect thirty days after enactment (with certain exceptions). Sec. 803 (e) (1) (B) authorizes to be appropriated such sums as may be necessary to pay the costs of proceedings. If an appropriation is not received, a technical problem could occur insofar as the old CARP system will have been abolished with no funds to support the new CRJ system. Hence, a further exception to the effective date provision might be considered to ensure a smooth transition.

* * *

H.R. 1417 makes changes that affect existing and future actions under sec. 115. NMPA and RIAA will provide comments on these changes shortly.

* * *

The following comments and proposals are made by the RIAA, as they apply only to both secs. 112 and 114, and it is the only party to this memorandum involved in both those proceedings:

Scheduling of Rate Adjustment Proceedings Under Sections 112 and 114: The amendments in H.R. 1417 schedule sec. 112 proceedings for all classes of licensees (preexisting subscription services, preexisting satellite digital audio radio services, eligible nonsubscription transmission services and new subscription services) for 2007, 2012 and at 5-year intervals thereafter. The amendments to sec. 114(f)(1)(A), however, establish a different schedule for the adjustment of performance royalties for preexisting subscription services and the preexisting satellite digital audio radio services. Those services are scheduled to have rate adjustment proceedings in 2006, 2011 and at 5-year intervals thereafter.

We believe the sec. 112 and 114 licenses for a particular class of services should run concurrently. By this we mean that the proceeding to establish rates and terms for the statutory licenses relied upon by preexisting satellite digital audio radio services ("SDARS"), for example, should be conducted at the same time rather than having the sec. 114 rate adjustment proceeding for the SDARS conducted in one year and the sec. 112 rate adjustment proceeding for the SDARS conducted in a subsequent year. We do not believe that it is more cost or time efficient to force copyright owners, on the one hand, and statutory licensees, on the other hand, to participate in two different proceedings in different years to establish performance royalties and ephemeral royalties, respectively, when the reproduction rights granted under sec. 112 and the performance rights granted under sec. 114 are inextricably intertwined for each class of service.

We propose that the bill be changed to provide for sec. 112 and 114 proceedings for (1) preexisting subscription services and preexisting satellite digital audio radio services to be conducted on the same schedule (e.g., starting in 2006 and at 5-year intervals thereafter, as is currently contemplated under the amendments set forth on page 37, lines 8-12) and (2) eligible nonsubscription transmission services and new subscription services to be conducted on a different schedule (e.g., starting in 2007 and at 5-year intervals thereafter).

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